ENR 2023 Top Owners Sourcebook: Owners In-between Market Shift
On the surface, an increase in construction in progress spending last year illustrates greater owner confidence in a post-COVID-19 market. But deeper industry challenges still remain. Owners and owner representatives anticipate that higher interest rates, materials costs and limited labor pools will dampen project prospects. Around this time last year, the construction market had a different set of priorities, says economist Anirban Basu, chairman and CEO of Sage Policy Group. “Just about every contractor was busy. There wasn’t much discussion about credit tightening. Backlog was elevated for just about everyone, and most major segments of construction were still experiencing substantial spending growth,” he says. “And people were looking forward to 2023.” In the interim, Basu says there has been a shift that has widened the disparities between sectors and what opportunities are available for owners. “Some segments of construction have weakened, meaningfully,” he explains, “while others have been becoming stronger. Therefore [there are] growing disparities in performance across the construction industry.” The X factor driving many sector disparities has been megaprojects, says Basu. “This is the era of the megaproject. And perhaps people realized that a year ago, but many of these megaprojects have now actually broken ground,” he explains, which has resulted in a greater strain on limited construction resources. Related Links: ENR 2023 Top Owners Sourcebook (PDF) (Subscription Required) ENR 2023 Top Owners Sourcebook (Articles) Economic Transformation Overall, construction-in-progress spending has increased 24.1% this year, up $506.59 billion from $407.74 billion last year. The largest spending increases are in the areas of metal mining (66.2%), photographic, medical and optical goods (63%) and electronics and electric products (59.2%). On the other hand, there have been decreases in paper and allied products, petroleum and coal products, and amusement and recreation services. Yet Basu argues that construction spending is “not so much a function of economic growth” as it is a function of “economic transformation.” He adds: “The economy is transforming in major ways, and not surprisingly, that coincides with major construction projects, otherwise known as megaprojects.” ENR Construction Cost Data Dashboard GET STARTED While some supply chains are back moving at pre-pandemic levels, some companies, such as General Motors, have chosen to invest in their manufacturing abilities to reduce reliance on international supply chains, Basu explains. “That is generating some enormously impactful construction projects related to the manufacturing sector—and that sector, not coincidentally, has generated more construction spending growth than any other segment of nonresidential construction during the pandemic and subsequent recovery period,” he says. “That has been in many ways driven by a combination of CEO decisions regarding supply chain locations amidst various logistical issues and public policies being promulgated by the federal government.” Public spending in the form of the $1.2-trillion Bipartisan Infrastructure Law and the $280-billion CHIPS and Science Law has also boosted work for contractors connected to infrastructure and energy sectors, says Basu. A desire for the private sector to simplify logistics and better protect intellectual property, combined with federal government subsidies to promote reshoring, resulted in “a boom in manufacture related construction,” says Basu. “Again, [it’s] not necessarily a function of economic growth or global economic growth; more a function of economic transformation,” he explains. Total CIP Rosy Outlook Despite the Federal Reserve’s attempts to slow economic growth with higher interest rates, and fears of an impending recession, last month the Commerce Department reported that the economy expanded at a 4.9% annual rate from July through September. Gross domestic product output indicated that consumers seemed to have a rosy economic outlook, indicated by increased spending. In the construction market, Basu explains that an impending influx of infrastructure projects are having the same effect on the market. “The Bipartisan Infrastructure Law was signed by President Biden in 2021. A year later, not many of these projects have moved forward,” says Basu. However, there is anticipation that more of those projects will enter the shovel-ready phase in the next few months. “So the outlook continues to be quite rosy, for those infrastructure-oriented contractors,” he says. For sectors more susceptible to higher interest rates, Basu says owners will have to weigh the greater risks against the rewards of moving forward with their projects. “And so a year later, it is really those developer-driven activities that are beginning to really stumble,” he explains. “Those developers are more sensitive to interest rate increases, and they’re finding project financing much more difficult to acquire.” The result is an increasing dichotomy between developer-driven segments and publicly-financed segments, with publicly-financed segments continuing […]
